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Tax Time for Nonprofits: Getting and Keeping Your Tax Exempt Status

Tax Time for Nonprofits: Getting and Keeping Your Tax Exempt Status

Becoming a Tax-Exempt Entity

Before an organization can file for tax-exempt status, it must file its organizing documents with the Secretary of State in the state in which it resides. Generally, this means you must have articles of incorporation, bylaws and an employer identification number from the IRS. For more info on filing in Washington State, visit this website.

Application for Tax-Exempt Status
Once the Secretary of State’s office has stamped your organizing documents, then you must complete IRS Form 1023 – Application for Recognition of Exemption Under Section 501(c)(3). Additional documents are required along with Form 1023 including: financial statements, articles of organization, bylaws (or other operating rules), user fees, and present and planned events of the organization in detail.

Washington Secretary of State Charities Office (SOS)

After the IRS has issued your Determination Letter, then you must register with the SOS Charity Program before soliciting charitable donations from the public.

Keeping Your Tax-Exempt Status

Once you get tax-exempt status for your nonprofit, the other important part is keeping it! There are many ways to get your tax exempt status revoked but the easiest way is to fail to meet routine reporting requirements. To help ensure that you keep your tax-exempt status, here are some things to keep in mind:

 1. Meticulous financial records

As with any business it is critically important to maintain detailed and accurate financial records. You will need to maintain minutes of all your board meetings. You will also need all other documentation applicable to your nonprofit. Another helpful byproduct of keeping excellent financial records is that it could help shield your board members from personal liability.

2. Proper conduct of a Nonprofit Organization

There are certain political and other types of considerations to be aware of in order to stay on the safe side of the law.

  • Although donations are an important way of getting financial support for many nonprofit organizations, there are limitations. Gifts from donors must be given without remuneration. Furthermore, nonprofits often must register any fundraising activities in which they propose to ask for donations with the state in which they reside.
  • Another important stipulation for nonprofits is that no individual person or business can profit financially from the organization. Salaries must be reasonable and commensurate with the position and expenses must be ordinary and necessary.
  • The nonprofit must pay excise tax on profits from activities that are unrelated to the mission and purpose of the organization.
  • If the nonprofit is dissolved, none of the assets will go to the board members, private individuals or businesses. The assets will be re-distributed to another nonprofit with a similar mission.

Filing Considerations

Almost all nonprofit organizations that are tax-exempt must file a return with the IRS. This return is called a Form 990, and is also called an annual information return. The form is a matter of public record which is one of the reasons that it must be vetted by all members of your board to make sure it correctly reflects your charity to potential donors.

IRS Form 990

There are three different variants of the Form 990 depending on how much money the nonprofit made that year. They are: Forms 990, 990-EZ and 990-N.

    • If the nonprofit has gross revenue of over $200,000 then it must file Form 990, which is the longest of the three types of forms.
    • If gross revenue is less than $200,000 but more than $50,000 then it must file Form 990-EZ, and
    • If the nonprofit has gross revenue of less than $50,000 then it must file Form 990-N which is often referred to as e-Postcard.

Each of the above three forms have various schedules that must be included. In addition to these forms, there is a separate form for Private Foundations called a Form 990-PF which has its own different set of reporting requirements.

What nonprofits are exempt from filing IRS Form 990s?

The following are some organizations, generally speaking, that are often exempt from filing Form 990: religious schools, government corporations and state institutions such as those concerned with public safety.

Form 990: What happens if you do not file?

If your organization does not file Form 990 for three consecutive years, the IRS will automatically revoke your tax-exempt status.

Please note that once you lose this status then you must reapply like you are new organization and in the mean time you may then be subject to income taxes like other types of for-profit companies.

The requirements delineated in this article are important in acquiring tax-exempt status but also in keeping that status. It may be advisable to hire a tax professional to make sure all rules involved in gaining this important status are adhered to and that all the necessary documentation for your nonprofit organization is in proper order.

We can help! If you need assistance with obtaining your tax exempt status or with your Form 990, please email Howard Donkin at howard@jjco.com.

Featured photo source: Pixabay.com

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